Sunday, Nov 06, 2016
Dubai: Much of the growth in Islamic finance is expected to come from capital markets business relating to sukuk (Islamic bond) according to Standard Chartered Saadiq.
“Sukuk is now mainstream component of capital markets in core Islamic finance markets such as Malaysia and the UAE. While Malaysia dominates the local currency issuance, the GCC leads in international sukuk issuance. There is a healthy pipeline of issuance across the world while we expect more issuers to come to the market over the next year,” said Ahsan Ali, Global Head of Islamic Origination.
Growing financing needs of sovereigns, sovereign related entities, corporates and financial institutions are expected to increase demand for capital market issuance across GCC in the future. Although a significant share of capital market issuance in the recent past have been dominated by conventional bond issuance and loan syndications, Ali expects GCC issuers to issue sukuks along with conventional bonds.
“Bulk of the further capital market issuances will be primarily driven by sovereigns and financial institutions. While sovereigns in the oil exporting countries will be seeking market funding for budget needs, the demand from financial institutions will be driven largely by liquidity and liquidity management needs,” said Ali.
Global sukuk issuance has been moderating since 2015 is expected to remain subdued this year and in 2017 according to rating agencies Moody’s and Standard & Poor’s.
The sukuk market experienced a correction in 2015 when Bank Negara Malaysia (the Malaysian central bank) decided to stop issuing short-term sukuk and switch to other instruments for liquidity management for Islamic financial institutions.
New sukuk issuance volumes have remained subdued so far for the first half of 2016 at $40 billion (Dh14.7 billion). This has been driven by more challenging economic conditions in emerging markets and the GCC’s move to tap conventional liquidity from international investors, as quantitative easing has been driving yields to zero or even negative rates in various markets.
The volume of issuance in the first half of 2016 was not that encouraging, particularly when compared with conventional issuance. Muslim-majority countries, such as Malaysia, Indonesia and the GCC countries account for around 90 per cent of total sukuk issuance, this is expected to remain unchanged in the near future.
Going forward, a pickup in issuance from Bank Negara Malaysia, coupled with the deficit financing needs of the GCC members and their drive to promote Islamic finance, is expected to boost issuance.
Saudi Arabia, despite strong religious affinity and a very prominent Islamic banking sector, remains relatively underweight in both international and domestic sukuk volumes. Like Malaysia, the country enjoys a deep base of local investors, issuers, intermediaries and service providers.
By Babu Das Augustine Banking Editor
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